Kevin Drum - March 2013

The situation in Cyprus has gone from bizarre to laughable to chaotic in just a matter of days, but the question I asked a few days ago remains on the table: Is Cyprus unique? Are investors buying the sales pitch that whatever happens, it has no larger meaning for Europe's other troubled economies? Ryan Avent says yes:

The most striking thing about the situation is that broader markets are taking assurances that Cyprus is a unique case at face value. European equities are flat for the week, and yields on peripheral sovereign debt have scarcely budged. Contagion looks like a non-issue. For that, at least, we can be thankful. Unless it leads to European Commission complacency, of course, leading officials to drive an even harder bargain—and possibly precipitate the sort of action, like a Cyprus exit, that might just send markets into a proper swoon. Things, we should have learned by now, can always get worse.

As with everything to do with the EU economy, there are no good answers for Cyprus. Just bad answers and (we hope) slightly less bad answers. So far, though, it looks like Cyprus's woes aren't affecting Spain or Portugal or Greece. They still have intractable problems that appear nearly impossible to solve, but at least they haven't gotten any more impossible over the past week.

The participation of men in the workforce has been declining for decades, and along with it so have male wages. David Autor has written a new paper suggesting that part of the reason might be the rise of single-parent households:

In this telling, the economic struggles of male workers are both a cause and an effect of the breakdown of traditional households. Men who are less successful are less attractive as partners, so women are choosing to raise children by themselves, producing sons who are less successful and attractive as partners.

“A vicious cycle may ensue,” wrote Professor Autor and his co-author, Melanie Wasserman, a graduate student, “with the poor economic prospects of less educated males creating differentially large disadvantages for their sons, thus potentially reinforcing the development of the gender gap in the next generation.”

....Professor Autor said in an interview that he was intrigued by evidence suggesting the consequences were larger for boys than girls, including one study finding that single mothers spent an hour less per week with their sons than their daughters. Another study of households where the father had less education, or was absent entirely, found the female children were 10 to 14 percent more likely to complete college. A third study of single-parent homes found boys were less likely than girls to enroll in college.

“It’s very clear that kids from single-parent households fare worse in terms of years of education,” he said. “The gender difference, the idea that boys do even worse again, is less clear cut. We’re pointing this out as an important hypothesis that needs further exploration. But there’s intriguing evidence in that direction.”

I've only skimmed through the paper itself, but it looks like Autor's evidence is indeed no more than suggestive. The growing gap between men and women is unquestionable, but the association between this gap and the rise of single-parent households is considerably less firm.

Still, it's intriguing, and Autor is a guy to take seriously. I'll try to have more later on this after I've read the paper more carefully.

According to a new HuffPost/YouGov poll, 69 percent of Americans think that most of the federal budget deficit could be eliminated by cutting "waste and fraud."

Um, what? More than two-thirds of Americans think the budget deficit is largely a result of waste and fraud? But wait! It's all explained by a deeper dive into the poll results:

A more detailed look at which programs were named by Democrats and by Republicans suggests that for many, waste is indeed defined as "money spent on some government program I don't like."

So there you have it. By logical concatenation, two-thirds of the American public think the budget deficit could be tamed largely by cutting spending on programs they don't like. That's a little more defensible. Now all we have to do is figure out which programs a majority of us don't like.1

Henry Farrell is happy that Daron Acemoglu and James Robinson are now arguing that economists need to think harder about politics, because if they did they’d see why unions are often well worth any deadweight cost. Here are Acemoglu and Robinson:

Faced with a trade union exercising monopoly power and raising the wages of its members, most economists would advocate removing or limiting the union’s ability to exercise this monopoly power, and this is certainly the right policy in some circumstances. But unions do not just influence the way the labor market functions; they also have important implications for the political system.

....Because the higher wages that unions generate for their members are one of the main reasons why people join unions, reducing their market power is likely to foster de-unionization. But this may, by further strengthening groups and interests that were already dominant in society, also change the political equilibrium in a direction involving greater efficiency losses. This case illustrates a more general conclusion, which is the heart of our argument: even when it is possible, removing a market failure need not improve the allocation of resources because of its impact on future political equilibria. To understand whether it is likely to do so, one must look at the political consequences of a policy: it is not sufficient to just focus on the economic costs and benefits.

I'm happy to read this because, like most normal human beings, I like it when smart people confirm my existing beliefs. Here's my version of the same argument, from a piece a couple of years ago about the death of organized labor as a mass movement:

With labor in decline, both parties now respond strongly to the interests of the rich—whose institutional representation is deep and energetic—and barely at all to the interests of the working and middle classes.

This has produced three decades of commercial and financial deregulation that started during the administration of a Democrat, Jimmy Carter, gained steam throughout the Reagan era, and continued under Bill Clinton. There were a lot of ways America could have responded to the twin challenges of '70s-era stagflation and the globalization of finance, but the policies we chose almost invariably ignored the stagnating wages of the middle class and instead catered to the desires of the superrich: hefty tax cuts on both high incomes and capital gains. Deregulation of S&Ls that led to extensive looting and billions in taxpayer losses. Monetary policy focused excessively on inflation instead of employment levels. Tacit acceptance of asset bubbles as a way of maintaining high economic growth. An unwillingness to regulate financial derivatives that led to enormous Wall Street profits and contributed to the financial crisis of 2008.

....It's impossible to wind back the clock and see what would have happened if things had been different, but we can take a pretty good guess. Organized labor, for all its faults, acted as an effective countervailing power for decades, representing not just its own interests, but the interests of virtually the entire wage-earning class against the investor class....If unions had been as strong in the '80s and '90s as they were in the '50s and '60s, it's almost inconceivable that they would have sat by and accepted tax cuts and financial deregulation on the scale that we got. They would have demanded economic policies friendlier to middle-class interests, they would have pressed for the appointment of regulators less captured by the financial industry, and they would have had the muscle to get both.

I always wished that this piece had gotten a little more attention, mainly because my conclusion was different from Acemoglu and Robinson's (and Farrell's). I agree with just about everything they say about the value of unions, but I also feel forced to acknowledge that it doesn't matter. As a truly powerful mass movement, unions are dead and they aren't coming back. This has left a gaping hole in American politics: Corporations and the rich continue to have enormous institutional power, while the working and middle classes have almost no one to speak for them.

I figure that filling this hole is the most important problem the left has to address over the next decade or so. Unfortunately, I don't know how. What kind of mass movement with truly powerful institutional support can take the place of unions?

Double-plus unfortunately, I think the reason my piece got so little attention is because no one else knows either. Why bother responding if you don't have an answer? Maybe Acemoglu and Robinson can do better.

From Richard Littlehale of the Tennessee Bureau of Investigation, explaining why wireless providers should be required to maintain long-term storage of every text message sent by every one of their subscribers:

Most cellular service providers do not retain stored text messages accessible to law enforcement for any time at all. Billions of texts are sent every day, and some surely contain key evidence about criminal activity. In some cases, this means that critical evidence is lost. Text messaging often plays a big role in investigations related to domestic violence, stalking, menacing, drug trafficking, and weapons trafficking.

How do you feel about the idea that carriers should store all of your text messages for years at a time "just in case" some law enforcement officer wants access to them someday? Probably about the same way that gun owners feel about proposals to license and register their guns just in case law enforcement wants to track them down someday. In other words, not so great.

In both cases, opposition might be softened if law enforcement were consistently required to get a search warrant before they're allowed access to your private digital data. But they're not, and Littlehale warns pointedly against "moving to a probable cause standard where it is not currently required." This, he says, would have "a negative impact on the time required for law enforcement to conduct certain types of investigations."

No doubt. Probable cause is certainly a pain in the ass. But if we don't need it in the digital world, why do we still need it in the physical world? Seems very anachronistic, doesn't it? One consistent rule for everything would probably be much more convenient.

President Obama on Monday nominated civil rights attorney Thomas E. Perez to be the next labor secretary, immediately drawing Republican opposition and another contentious confirmation fight on Capitol Hill. Shortly after Mr. Obama made the announcement, Sen. David Vitter, Louisiana Republican, said he would prevent Mr. Perez’s nomination from moving forward until the Justice Department responds to a 2011 letter accusing it of “spotty” enforcement of national voting rights laws.

Sen. Roy Blunt (R-Mo.) said Monday that he would place a procedural hold on President Obama’s pick to run the Environmental Protection Agency (EPA). Blunt threatened to block the confirmation of Gina McCarthy, who currently heads EPA’s Office of Air and Radiation, until he gets an update on a U.S. Army Corps of Engineers project to repair a levee on the Mississippi River system.

And now for the list of high-profile nominees who haven't been blocked or filibustered: John Kerry.

Are we going to keep playing the game where we pretend that by some immense coincidence, every single high-profile position in the Obama administration is being offered to someone who's a dangerous radical? That there's no broad plan to simply block everyone, it's just that every nominee has some kind of unique problem that really, truly needs deep investigation by the Senate?

We're not children here, and it's obvious what's going on. This isn't an Obama problem, it's a Republican Party problem. When will the earnest pundits and talking heads start suggesting that Mitch McConnell needs to show a little more leadership here?

Via Tyler Cowen, here's a chart from Sober Look that tracks the price of a basket of defense stocks—the iShares defense industry ETF—since the beginning of the year. The index underperformed the market for a bit during February, but it's fully caught up since then. "Just like the public at large," says SL, "investors now believe the sequester law will be reversed in short order. US aerospace and defense shares have rallied to outperform the S&P500."

This is a bit mysterious though. It's obviously true that investors are sanguine, but I'm sure not seeing any reason for it, at least not in the short term. The defense cuts might be reversed during the next budget cycle, but there seems little chance of the sequester being renegotiated for FY2013. Is this all that investors care about? Or am I missing something?

As we approach the tenth anniversary of the American invasion of Iraq on March 20, it's worth reflecting on the fact that it has been nearly seventy years since America's last successful major war.

On August 15, 1945, known as Victory Over Japan Day or V-J Day, the Japanese unconditionally surrendered, marking the end of the Second World War and establishing the United States as a superpower. Since that day, the United States has lost three major wars—Korea, Vietnam, and Iraq—and is counting down the months until its loss in Afghanistan.

James doesn't count the Gulf War as a major conflict, and doesn't count the Cold War since it wasn't fundamentally a military conflict. Those are both pretty defensible judgments.

So what do all these unsuccessful wars have in common? I'd focus on one thing: none of them were ever intended to be major wars. They just growed like Topsy, so to speak. Conversely, the U.S. has arguably been successful in plenty of wars that were meant to be small and really did stay small: the Dominican Republic, Grenada, Panama, Kosovo, Libya, etc.

So there's your lesson: if you plan for a small war, be damn sure that it's going to stay small. If it might not, then plan for a big war. If that's unacceptable, don't go to war. That's the bare minimum lesson, anyway.

Today, Neil Irwin revisits this, and suggests that a new report from Goldman Sachs has the explanation:

Key to understanding the sluggish growth in construction jobs is a concept called "labor hoarding." That's what happens during a recession when companies don't fire as many workers as the decline in business would seemingly have justified. Firms don't want to lose all their quality workers and then be unable to keep up with demand when business finally turns around, so they keep people on staff even when there is not enough work to keep them fully busy.

This seems to have happened on a large scale in construction in the last few years....But because construction companies never fired as many workers as the collapse in their business would have justified, that means that over the last year, they haven't needed to hire additional workers to keep up with the uptick in business.

I think this is probably right. A day after I first wrote about this, I posted an update that took a longer-term look at housing starts and construction employment. The basic chart is on the right, and sure enough, it looks as if construction employment (the red line) didn't drop as much as you might expect based on the last big housing bust in the early 90s. Back then, there was about an 18-month lag before employment started to catch up to the rebound in housing starts, but this time, because employment didn't drop as much, it might take two or three years before we start to see job growth. In other words, it might still be about 12 months before we see a substantial uptick in construction employment.

The Cyprus bailout plan, which raises about €6 billion by taxing bank accounts, is having problems. Small savers don't think their bank accounts should be taxed at all, and big savers (i.e., Russian plutocrats) are unhappy too. But Felix Salmon says there's a solution. A paper by sovereign debt guru Lee Buchheit suggests that Cyprus simply convert every bank account over €100,000 into a 5-year CD. Or a 10-year CD. That's it. Problem solved.

I'll trust that Buchheit has done the math correctly, but I don't quite get the point. "To be sure," says Felix—and this is always where the rabbit goes back into the hat—"the new CDs, which would be tradable, would surely trade at less than par: there would be a present-value haircut on deposits over €100,000. But that’s going to happen anyway. And at least in this case patient depositors will have a chance of getting all their money back in full — with interest."

I don't get this. What's the difference between having your account taxed by 10% or receiving a CD that you can sell for 10% off its face value? In both cases you have 90% of what you used to have, and in both cases you can then either leave your money in Cyprus or invest it somewhere else.

Still, even if it turns out that depositors would see little difference between taxes and CDs, Buchheit suggests that the CD option would have benefits for Cyprus itself: "Terming out excess deposits will effectively lock in that funding to the banks for many years. The alternative (debiting 9.9 percent now and watching the balance of 90.1 percent get out of Dodge when the banks reopen) may easily require the bailout package to be reworked in a month’s time." True. On the other hand, a tax can be unilaterally imposed with no real legal question marks. Buchheit's plan also requires a restructuring of Cyprus's sovereign bonds, and there would be loads of legal question marks there.

In any case, it's a clever sort of solution, and all things considered, it might be better than the tax. When you strip it bare, though, it amounts to much the same thing. One way or another, no matter how much you try to paper things over, someone has to come up with a few billion euros. That's a hard rabbit to hide.